Rail Crunch Leaves Wheat, Oil Stuck in Canada

(Bloomberg) -- A shortage of rail cars in Canada is leaving grain and oil shipments stranded on the Prairies, sending crude prices plummeting and leaving farmers in a cash crunch.

The nation’s biggest railways haven’t been able to deliver enough cars after harsh winter conditions and as a sudden boom in energy production sparked a swell of demand. Some farmers have been waiting for months to deliver wheat and canola to elevators before they can get paid. The squeeze also means that crude supplies are piling up in Alberta, pushing prices to the biggest discount relative to New York futures in more than four years.

The bottleneck mean some Canada’s commodity producers are getting left behind as other nations take advantage of a recent run up in global prices. Benchmark wheat futures in Chicago are up more than 8 percent since the end of November, while West Texas Intermediate in New York added more than 6 percent.

“We make these contracts because we have payment obligations at a certain time of the year, so we need that cash at that time of the year, not three, four months later,” said Norm Hall, vice president of the Agricultural Producers Association of Saskatchewan. If farmers have loan payments, they’re “depending on this cash, or maybe it’s a rent payment. They get hit hard,” he said.

Since August, Canadian National Railway Co. has canceled almost 13,000 hopper car orders, and there are 1,072 outstanding orders for rail cars as of Feb. 8, data from the Ag Transport Coalition show. Another 996 orders for hopper cars from Canadian Pacific Railway Ltd. haven’t been filled, according to the group, which represents agriculture associations, including the Alberta Wheat Commission, Canadian Canola Growers Association and Pulse Canada.

Canadian National has been dealing with “challenging operating conditions,” including harsh winter weather, and the railway’s recent volume growth has created “pinch points” on its network, spokeswoman Kate Fenske said in an emailed statement. The railway is bringing on additional crews and locomotives as soon as the ground thaws and the company plans to boost capital spending to C$3.2 billion ($2.6 billion) this year to further support network capacity, Fenske said.

Canadian Pacific said it has moved 4 percent more grain this crop year.

“While we are dealing with some extreme weather currently, we continue to deliver for our customers and supply chain,” Jeremy Berry, a CP spokesman, said in an email.

Still, the grain backlog for farmers is the worst since 2013, according to the Western Grain Elevator Association.

The shortfall comes amid growing demand from other sectors, including frack sand, said Wade Sobkowich, executive director of the Winnipeg, Manitoba-based Western Grain Elevator Association, which represents the country’s largest grain shippers, including Richardson International Ltd. and Cargill Ltd.

Railways are also struggling to accommodate a surge of oil after several years of slower production growth. The as much as 45 percent surge in demand to ship crude by rail in the third quarter “caught us a little bit by surprise,” Ghislain Houle, Canadian National Railway’s chief financial officer, said Tuesday at a conference.

The boom in production coupled with the rail delays means that inventories are building up in Alberta, where it’s priced. Canadian heavy oil’s discount to West Texas Intermediate futures widened to $30.60 a barrel last week, the biggest discount since December 2013, data compiled by Bloomberg show.